Financial Statements of a Company notes: CBSE Class 12 Accountancy

1. Meaning and nature of financial statements

Financial statements are the end products of the accounting process: summaries prepared at the end of a period to show the financial position (balance sheet) and the results (statement of profit and loss) of an enterprise.

For a company (Section 2(40), Companies Act, 2013): Balance Sheet; Statement of Profit and Loss; Cash Flow Statement; Statement of Changes in Equity, if applicable; explanatory notes. Section 129: they must give a true and fair view and comply with the Accounting Standards, in the form of Schedule III (Division I for companies following the Accounting Standards).

Nature: a mixture of

recorded facts (amounts as entered in the books),
accounting conventions (conservatism, consistency, materiality),
postulates (going concern, money measurement, accounting period),
personal judgements (depreciation method and life, inventory valuation, provisions).

Section 2(40), Companies Act, 2013; form as per Schedule III (Section 129).
Financial statement	What it shows
Balance Sheet	Financial position on a date: assets, and the equity and liabilities that finance them
Statement of Profit and Loss	Income, expenses and the profit or loss for a period
Cash Flow Statement	Cash coming in and going out during the period
Statement of Changes in Equity (if applicable)	How the owners’ equity moved during the period
Notes to accounts	The details, policies and break-ups behind the figures

Table of the nature of financial statements: recorded facts, accounting conventions, postulates or assumptions, and personal judgements, each with an example
Element	What it means	An example
Recorded facts	Only transactions entered in the books, at their recorded amounts	Machinery shown at what was paid for it
Accounting conventions	Agreed rules of presentation	Conservatism: provide for a likely bad debt
Postulates (assumptions)	Basic assumptions behind the accounts	Going concern: the company will keep working
Personal judgements	Choices and estimates by the accountant	Useful life of a machine; method of valuing stock

Key terms

Financial statements: Summaries of the accounts of a period showing financial position and results.
Schedule III: Schedule to the Companies Act, 2013 prescribing the form of the balance sheet and the statement of profit and loss.
True and fair view: Statements free from material misstatement and prepared on accepted principles.

2. Objectives, importance and users

Objectives: to show the economic resources and obligations of the business; to report its earning capacity; to give information on cash flows; to help judge the effectiveness of management; to disclose accounting policies and other information needed to understand the figures.

Importance to users:

Shareholders and investors: profitability, growth, dividend, safety of capital.
Trade creditors: short-term liquidity (current assets against current liabilities).
Banks, lenders, debenture holders: long-term solvency, interest-paying capacity.
Management: planning, control, comparison with budgets.
Employees: bonus, wages, job security.
Government and regulators: taxation, compliance, economic policy.

Balance sheet equation: Equity and Liabilities (Shareholders' Funds + Non-current Liabilities + Current Liabilities) = Total Assets.

Table of users of financial statements, their main question and what they look at: shareholders, trade creditors, banks and debenture holders, management, employees and government
User	Main question	Looks mainly at
Shareholders and investors	Is it profitable and is my money safe?	Profit for the year, reserves, dividend record
Trade creditors	Will I be paid in a few months?	Current assets against current liabilities
Banks and debenture holders	Will interest and principal be paid?	Borrowings, finance costs, profit before interest
Management	Did we meet our plans?	Every head, compared with budgets
Employees	Is a fair bonus and job security possible?	Profit, employee benefits expense
Government	How much tax? Is the law followed?	Profit before tax, disclosures

Table of objectives of financial statements: show resources and obligations, report earning capacity, give cash flow information, show the effectiveness of management and disclose accounting policies
Objective	Users can then…
Show economic resources and obligations	judge financial strength and solvency
Report earning capacity (profit or loss)	compare performance across years and firms
Give information about cash flows	judge the ability to pay its way
Show how management used resources	assess stewardship and efficiency
Disclose accounting policies	read and compare the figures correctly

Equity and liabilities always equal total assets.
Kaveri Paints Ltd, 31 March 2026	₹
Total assets (= total of Equity and Liabilities)	48,00,000
Less: Non-current liabilities	12,00,000
Less: Current liabilities	8,50,000
Shareholders' funds	27,50,000
Less: Share capital	20,00,000
Reserves and Surplus	7,50,000

Key terms

Short-term solvency: Ability to meet obligations falling due within a year out of current assets.
Long-term solvency: Ability to pay interest and repay long-term debt.

3. Limitations of financial statements

Historical: they record past events; future results must be estimated separately.
Price-level changes ignored: assets at historical cost; figures of different years are not comparable in real terms.
Only monetary information: qualitative factors (quality of management, labour relations, reputation) are left out.
Personal judgement: depreciation methods, inventory valuation and provisions affect the profit shown.
Not exact: profit of a period is provisional; the true profit is known only when the business closes.
Window dressing: the position on the balance sheet date can be presented more favourably than it really is.

Table of limitations of financial statements: historical, ignore price-level changes, only monetary facts, affected by personal judgement, not exact, and open to window dressing
Limitation	What it means for a reader
Historical	They report the past; the future must be judged separately
Price-level changes ignored	Old assets stay at cost, so values look out of date
Only money facts	Skill, morale and reputation are left out
Personal judgement	Methods and estimates change the profit figure
Not exact	True profit is known only when the business ends
Window dressing possible	Figures can be made to look better on the date

Key terms

Historical cost: The original price paid for an asset, the basis on which most assets are shown.
Window dressing: Presenting the financial position on the balance sheet date better than it really is.

4. The Schedule III balance sheet: heads and sub-heads

Form: vertical, with I. Equity and Liabilities and II. Assets, columns for Particulars, Note No., and figures for the current and the previous reporting date.

Equity and Liabilities: (1) Shareholders' Funds: Share Capital, Reserves and Surplus, Money Received against Share Warrants; (2) Share Application Money Pending Allotment; (3) Non-current Liabilities: Long-term Borrowings, Other Long-term Liabilities, Long-term Provisions; (4) Current Liabilities: Short-term Borrowings, Trade Payables, Other Current Liabilities, Short-term Provisions.

Assets: (1) Non-current Assets: (a) Property, Plant and Equipment and Intangible Assets — (i) Property, Plant and Equipment, (ii) Intangible Assets, (iii) Capital Work-in-Progress; (b) Non-current Investments; (c) Long-term Loans and Advances; (d) Other Non-current Assets. (2) Current Assets: Current Investments, Inventories, Trade Receivables, Cash and Cash Equivalents, Short-term Loans and Advances, Other Current Assets.

Schedule III, Division I (deferred tax lines omitted at this level).
Head (Equity and Liabilities)	Sub-heads
Shareholders' Funds	(a) Share Capital; (b) Reserves and Surplus; (c) Money Received against Share Warrants
Share Application Money Pending Allotment	— (shown as a head by itself)
Non-current Liabilities	(a) Long-term Borrowings; (b) Other Long-term Liabilities; (c) Long-term Provisions
Current Liabilities	(a) Short-term Borrowings; (b) Trade Payables; (c) Other Current Liabilities; (d) Short-term Provisions

Schedule III, Division I (deferred tax assets and intangible assets under development omitted at this level).
Head (Assets)	Sub-heads
Non-current Assets	(a) Property, Plant and Equipment and Intangible Assets: (i) Property, Plant and Equipment, (ii) Intangible Assets, (iii) Capital Work-in-Progress; (b) Non-current Investments; (c) Long-term Loans and Advances; (d) Other Non-current Assets
Current Assets	(a) Current Investments; (b) Inventories; (c) Trade Receivables; (d) Cash and Cash Equivalents; (e) Short-term Loans and Advances; (f) Other Current Assets

Key terms

Shareholders' funds: Share capital plus reserves and surplus (and money received against share warrants).
Non-current liability: A liability not due for settlement within the operating cycle or twelve months.
Notes to accounts: Schedules giving the details behind each total on the face of the statements.

5. Classifying items: operating cycle, the twelve-month rule and tricky items

Operating cycle: the time between acquiring assets for processing and realising them in cash or cash equivalents. If it cannot be identified, it is assumed to be twelve months.

Current asset: realised, sold or consumed in the normal operating cycle; held mainly for trading; realised within 12 months after the reporting date; or unrestricted cash or cash equivalent. Current liability: settled in the normal operating cycle; held for trading; due within 12 months; or settlement cannot be deferred beyond 12 months. All others are non-current.

Items to watch:

Calls in advance, unpaid dividend, interest accrued on debentures, outstanding expenses, income received in advance → Other Current Liabilities.
Provision for tax → Short-term Provisions; provision for gratuity payable on retirement → Long-term Provisions.
Bank overdraft, cash credit, loans repayable on demand → Short-term Borrowings; the instalment of a long-term loan due within 12 months (current maturities) → Short-term Borrowings under the 2021 amendment (older books show it under Other Current Liabilities).
Loose tools, stores and spares → Inventories; capital work-in-progress → with property, plant and equipment; computer software, patents, trademarks, goodwill → Intangible Assets.
Calls in arrears → deducted in the share capital note; debit balance of the Statement of Profit and Loss → deducted in Reserves and Surplus.

Everything else is non-current.
An ASSET is current if it is…	A LIABILITY is current if it is…
expected to be realised, sold or used up in the normal operating cycle	expected to be settled in the normal operating cycle
held mainly for trading	held mainly for trading
expected to be realised within 12 months after the balance sheet date	due to be settled within 12 months after the balance sheet date
cash or a cash equivalent (not restricted)	one whose settlement the company cannot defer beyond 12 months

Operating cycle: from buying materials to collecting cash. Not identifiable? Take 12 months.

Instalment positions are computed from the due dates.

From SOYL’s classification table; current maturities follow the 2021 amendment to Schedule III.
Item	Major head	Sub-head
Calls in advance	Current Liabilities	Other Current Liabilities
Unpaid dividend	Current Liabilities	Other Current Liabilities
Interest accrued on debentures	Current Liabilities	Other Current Liabilities
Outstanding expenses	Current Liabilities	Other Current Liabilities
Provision for tax	Current Liabilities	Short-term Provisions
Bank overdraft	Current Liabilities	Short-term Borrowings
Current maturities of long-term borrowings	Current Liabilities	Short-term Borrowings
Debentures	Non-current Liabilities	Long-term Borrowings
Provision for gratuity payable on retirement	Non-current Liabilities	Long-term Provisions

Classification table of assets: loose tools and stores and spares are inventories; capital work-in-progress and computer software belong to the property, plant and equipment and intangible assets group; long-term investments and capital advances are non-current; marketable securities are current investments; cheques in hand are cash and cash equivalents; advance to suppliers is a short-term advance; prepaid expenses are other current assets
Item	Major head	Sub-head
Loose tools	Current Assets	Inventories
Stores and spares	Current Assets	Inventories
Capital work-in-progress	Non-current Assets	Property, Plant and Equipment and Intangible Assets: Capital Work-in-Progress
Computer software	Non-current Assets	Property, Plant and Equipment and Intangible Assets: Intangible Assets
Long-term investments	Non-current Assets	Non-current Investments
Capital advances	Non-current Assets	Long-term Loans and Advances
Marketable securities held for sale within a year	Current Assets	Current Investments
Cheques in hand	Current Assets	Cash and Cash Equivalents
Advance to suppliers	Current Assets	Short-term Loans and Advances
Prepaid expenses	Current Assets	Other Current Assets

Key terms

Operating cycle: Time from acquiring assets for processing to realising them in cash; twelve months if not identifiable.
Current maturities of long-term borrowings: Instalments of a long-term loan payable within twelve months of the balance sheet date.
Calls in advance: Money received on shares before a call is made; a current liability until the call.

6. Notes to accounts and preparing the balance sheet

Steps:

Classify every balance under its major head and sub-head.
Prepare a note for each sub-head that has more than one item or a deduction (and always for Share Capital).
Carry each note total to the face of the balance sheet against its Note No.
Total each part; the two totals must agree.

Share capital note: authorised capital and issued capital (for information); subscribed and fully paid; subscribed but not fully paid (amount called up); less calls in arrears.

Paid-up capital = called-up capital − calls in arrears.

Deductions shown inside notes: accumulated depreciation (Property, Plant and Equipment), provision for doubtful debts (Trade Receivables), calls in arrears (Share Capital), debit balance of the Statement of Profit and Loss (Reserves and Surplus).

Equity and Liabilities = Assets = ₹9,85,000.
Particulars	Note No.	31 March 2026 (₹)
I. Equity and Liabilities
1. Shareholders' Funds
(a) Share Capital	1	5,00,000
(b) Reserves and Surplus	2	1,40,000
2. Non-current Liabilities
(a) Long-term Borrowings		2,00,000
3. Current Liabilities
(a) Trade Payables	3	1,00,000
(b) Other Current Liabilities	4	15,000
(c) Short-term Provisions		30,000
Total		9,85,000
II. Assets
1. Non-current Assets
(a) Property, Plant and Equipment and Intangible Assets
(i) Property, Plant and Equipment	5	6,00,000
(ii) Intangible Assets		40,000
(b) Non-current Investments		60,000
2. Current Assets
(a) Inventories	6	1,10,000
(b) Trade Receivables	7	85,000
(c) Cash and Cash Equivalents	8	85,000
(d) Other Current Assets		5,000
Total		9,85,000

Each note total is the figure on the face of the balance sheet.
Note No.	Particulars	₹
1	Share Capital
	Authorised capital: 1,00,000 equity shares of ₹10 each	10,00,000
	Issued capital: 50,000 equity shares of ₹10 each	5,00,000
	Subscribed capital: subscribed and fully paid — 50,000 equity shares of ₹10 each	5,00,000
	Total	5,00,000
2	Reserves and Surplus
	General reserve	80,000
	Surplus, i.e. balance in the Statement of Profit and Loss	60,000
	Total	1,40,000
3	Trade Payables
	Trade creditors	75,000
	Bills payable	25,000
	Total	1,00,000
4	Other Current Liabilities
	Unpaid dividend	5,000
	Interest accrued on debentures	10,000
	Total	15,000
5	Property, Plant and Equipment
	Land and buildings	4,00,000
	Plant and machinery	2,50,000
	Less: Accumulated depreciation	(50,000)
	Total	6,00,000
6	Inventories
	Raw materials	45,000
	Finished goods	55,000
	Loose tools	10,000
	Total	1,10,000
7	Trade Receivables
	Trade debtors	70,000
	Bills receivable	18,000
	Less: Provision for doubtful debts	(3,000)
	Total	85,000
8	Cash and Cash Equivalents
	Cash at bank	77,000
	Cash in hand	8,000
	Total	85,000

Share Capital on the balance sheet: ₹13,94,000.
Note No.	Particulars	₹
1	Share Capital
	Authorised capital: 2,00,000 equity shares of ₹10 each	20,00,000
	Issued capital: 1,50,000 equity shares of ₹10 each	15,00,000
	Subscribed capital: subscribed and fully paid — 1,38,000 equity shares of ₹10 each	13,80,000
	Subscribed capital: subscribed but not fully paid — 2,000 equity shares of ₹10 each, fully called up	20,000
	Less: Calls in arrears	(6,000)
	Total	13,94,000

Authorised and issued capital are shown in the note for information only.
Term	Meaning
Authorised capital	The maximum capital the company may issue, as stated in its memorandum
Issued capital	The part offered to the public or others for subscription
Subscribed capital	The part actually taken up by subscribers
Called-up capital	The part of subscribed capital that has been demanded
Paid-up capital	Called-up capital less calls in arrears: the figure on the balance sheet

Key terms

Paid-up capital: Called-up capital less calls in arrears.
Subscribed capital: The part of issued capital actually taken up by investors.

7. The Statement of Profit and Loss

Format (2026–27 syllabus):

I. Revenue from Operations (sale of products, sale of services, other operating revenue such as scrap)
II. Other Income (interest, dividend, rent from non-business property, profit on sale of fixed assets)
III. Total Income = I + II
IV. Expenses: Cost of Materials Consumed; Purchases of Stock-in-Trade; Changes in Inventories of Finished Goods, Work-in-Progress and Stock-in-Trade; Employee Benefits Expense; Finance Costs; Depreciation and Amortisation Expense; Other Expenses
V. Profit before Tax = III − IV; less tax expense = Profit for the Year

Cost of materials consumed = opening materials + purchases − closing materials.

Change in inventories = opening − closing (a rise in inventories gives a negative figure).

The profit for the year is carried to the surplus under Reserves and Surplus. Exceptional and extraordinary items and discontinued operations are not in the 2026–27 syllabus.

The 2026–27 syllabus format.
Line	What it contains
I. Revenue from Operations	Sale of products and services, other operating revenue (scrap)
II. Other Income	Interest, dividends, rent from non-business property, profit on sale of fixed assets
III. Total Income	I + II
IV. Expenses	Seven heads: materials consumed; purchases of stock-in-trade; changes in inventories; employee benefits; finance costs; depreciation and amortisation; other expenses
V. Profit before Tax	III − IV
Tax and Profit for the Year	Profit before tax less tax expense

Table of statement of profit and loss heads with typical items: revenue from operations, other income, purchases of stock-in-trade, employee benefits such as salaries and provident fund, finance costs such as interest, depreciation and amortisation, and other expenses such as rent, power and advertisement; with formulas for materials consumed and change in inventories
Head	Typical items (SOYL classification table)
Revenue from Operations	Sale of products; Sale of services; Sale of scrap
Other Income	Interest received on investments; Dividend received; Profit on sale of machinery; Rent received from letting a spare building
Purchases of Stock-in-Trade	Purchases of stock-in-trade
Employee Benefits Expense	Salaries and wages; Contribution to provident fund; Staff welfare expenses; Bonus to employees
Finance Costs	Interest on debentures; Interest on bank loan; Interest on bank overdraft
Depreciation and Amortisation Expense	Depreciation; Amortisation of patents
Other Expenses	Rent; Power and fuel; Advertisement; Audit fees
Cost of Materials Consumed	Opening materials + purchases − closing materials
Changes in Inventories of Finished Goods, Work-in-Progress and Stock-in-Trade	Opening inventories − closing inventories

Statement of profit and loss of Sabari Spices for the year ended 31 March 2026: total income 25,60,000, total expenses 20,10,000, profit before tax 5,50,000, tax 1,65,000 and profit for the year 3,85,000
Particulars	Note No.	Year ended 31 March 2026 (₹)
I. Revenue from Operations	1	25,00,000
II. Other Income	2	60,000
III. Total Income (I + II)		25,60,000
IV. Expenses
Cost of Materials Consumed	3	10,80,000
Changes in Inventories of Finished Goods, Work-in-Progress and Stock-in-Trade	4	40,000
Employee Benefits Expense	5	4,50,000
Finance Costs	6	70,000
Depreciation and Amortisation Expense		1,20,000
Other Expenses	7	2,50,000
Total Expenses		20,10,000
V. Profit before Tax (III − IV)		5,50,000
VI. Tax Expense (30% of profit before tax)		1,65,000
VII. Profit for the Year (V − VI)		3,85,000

Notes of Sabari Spices: revenue from operations, other income, cost of materials consumed 10,80,000, change in inventories 40,000, employee benefits, finance costs and other expenses
Note No.	Particulars	₹
1	Revenue from Operations
	Sale of products	24,00,000
	Sale of services	1,00,000
	Total	25,00,000
2	Other Income
	Interest received on investments	40,000
	Profit on sale of machinery	20,000
	Total	60,000
3	Cost of Materials Consumed
	Opening inventory of materials	1,20,000
	Add: Purchases of materials	11,00,000
	Less: Closing inventory of materials	(1,40,000)
	Total	10,80,000
4	Changes in Inventories of Finished Goods, Work-in-Progress and Stock-in-Trade
	Opening inventory of finished goods	2,00,000
	Less: Closing inventory of finished goods	(1,60,000)
	Total	40,000
5	Employee Benefits Expense
	Salaries and wages	4,20,000
	Contribution to provident fund	30,000
	Total	4,50,000
6	Finance Costs
	Interest on debentures	60,000
	Interest on bank overdraft	10,000
	Total	70,000
7	Other Expenses
	Rent	90,000
	Power and fuel	1,10,000
	Advertisement	50,000
	Total	2,50,000

The closing surplus goes into the Reserves and Surplus note of the balance sheet.
Surplus (balance in the Statement of Profit and Loss)	₹
Opening balance, 1 April 2025	1,15,000
Add: Profit for the year	3,85,000
Less: Transfer to General Reserve	(1,00,000)
Closing balance, 31 March 2026	4,00,000

Key terms

Revenue from operations: Income from the main business activity of the company.
Finance costs: Interest and other costs of borrowing.
Stock-in-trade: Goods bought for resale without processing.

Exam tips

Common mistakes

Showing calls in advance as share capital (it is an other current liability) or calls in arrears as an asset (it is deducted in the share capital note).
Showing a debit balance of profit and loss on the assets side instead of deducting it in Reserves and Surplus.
Putting loose tools with plant and machinery (they are inventories).
Showing the whole of a long-term loan as long-term: the instalment due within 12 months is current.
Forgetting the Note No. column, or giving a total on the face without a note.
In the Statement of Profit and Loss, putting interest under other expenses (it is Finance Costs) or a gain on selling a machine under revenue from operations (it is Other Income).

How marks are usually awarded

1 mark: one classification, format line or concept.
3 marks: three objectives or limitations; classifying six items at ½ mark each; a note to accounts.
4 marks: classifying eight items at ½ mark each; one part of the balance sheet or a short Statement of Profit and Loss with notes.
6 marks: a full balance sheet or Statement of Profit and Loss with notes (format, notes and totals carry separate marks).

Figures in SOYL practice are imagined; your board paper will give its own.

1. Meaning and nature of financial statements

Key terms

2. Objectives, importance and users

Key terms

3. Limitations of financial statements

Key terms

4. The Schedule III balance sheet: heads and sub-heads

Key terms

5. Classifying items: operating cycle, the twelve-month rule and tricky items

Key terms

6. Notes to accounts and preparing the balance sheet

Key terms

7. The Statement of Profit and Loss

Key terms

Exam tips

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